- Proposed reforms to improve transparency call for 2-day lag
- Canadian bond market facing liquidity, fairness concerns
Canada’s push to bring more transparency to its corporate bond market is only getting started and could shrink the proposed reporting time even further and boost electronic trading, according to a manager at the Ontario Securities Commission in charge of the project.
While a new transparency system proposed earlier this month would call for a lag time of about two days before trade prices go public, that wait time could be shrunk to one day, Tracey Stern, the OSC official overseeing the overhaul, said at the Bloomberg Canadian Fixed Income Conference in New York. The disclosure requirement is part of a plan that would for the first time provide data to the public on every corporate bond for free by 2017.
“We’re not done yet,” Stern said Wednesday in an interview with Matthew Winkler, editor-in-chief emeritus for Bloomberg. “There will be greater transparency, which hopefully will bring greater liquidity. The possible negatives of greater transparency will be outweighed by greater liquidity.”
Canadian regulators are pursuing reforms to the country’s C$500 billion ($375 billion) corporate bond market, long held by some investors to be opaque and unfair to smaller participants. The changes are intended to increase transparency for all investors while still preserving liquidity, or the biggest players’ ability to trade large amounts at a time.
The regulators, bank-owned investment dealers and some of the market’s biggest players say the two-day delay is a necessary concession to the way bonds are traded in Canada’s smaller market to avoid it freezing up. Many small investors and other critics of the proposed two-day rule counter by pointing to the U.S.’s reporting system, which operates with a 15-minute lag, and Europe, which is building a system expected to have a delay of just five minutes.
Canada’s smaller, more concentrated bond market means that transparency reforms have to be rolled out carefully to ensure that liquidity isn’t compromised, Stern said.
Harder to Trade
Dealers, through their industry body, the Investment Industry Association of Canada, have said more transparency could make it harder to trade corporate bonds because it might be more difficult to use their own balance sheets to facilitate trades.
Because bonds are traditionally traded privately instead of over an exchange, when there was no immediate buyer for a security, a dealer could take it on their balance sheet until one emerged. More transparency might allow the rest of the market to trade against the dealer if they can guess what they’re holding.
Investors are getting used to operating in an environment with more transparency and are adjusting their portfolios to anticipate liquidity more actively, Stern said.
Turnover in the corporate bond market has fallen to its lowest point in at least a decade and the gulf between prices offered to buy securities versus those to sell them is widening. That suggests liquidity -- or the ability to sell a bond without moving prices -- is draining from the market, according to a June study from Barclays Plc.
The onus is on the regulators in Canada to expand access to information in the bond market, Stern said. She’s a proponent of electronic trading because it allows buyers and sellers to come together without an intermediary, improving accessibility to the bond market.
“You can’t stop technology” Stern said. “It’s a disrupter and it provides people with an opportunity to do different things.”